"It's often been observed that the first casualty of war is the truth. But that's a lie, too, in its way. The reality is that, for most wars to begin, the truth has to have been sacrificed a long time in advance." L. Neil Smith

16 June 2009

And the Winner Is.... the SDR?

This is a significant development.

It appears clear now that the preferred alternative to the US dollar reserve currency regime for international transactions is going to be the Special Drawing Rights (SDR) units from the International Monetary Fund. We have seen indications that this was going to be the alternative, as compared to the euro, but it was not so confident a probability as it seems today.

Now it seems to be. And those SDR units will be an adjusted basket of commodities and currencies that will be more reflective of the current global economic picture. This may be phased in over time if the US and its political supporters have their way.

This is important because it is feasible, a realistic alternative, much more practical than the complete replacement of the US dollar by something else like the euro for example. We may also see more bilateral agreements based on local currencies.

Achieving the concurrence of the Saudis and other US client states will be important, because the dollar reserve strength has been largely based on its political connection to oil and military power. Most commentators and analysts miss this, but it is essentially at the heart of the matter. History may look back on this as a period of neo-colonialism since it has been so pervasive and uneven in its geopolitical relationships, especially since the 1970's: a Pax Americana.

This is not to say that the IMF's SDRs will be THE solution. They may very well falter. But if one is looking for a politically and financially palatable alternative to break the Big Dollar cartel, this looks likely to us. If it falters, it will be replaced with something else, most likely after some 'tinkering' with the basket composition first.

Let's keep an eye on this. But it is our judgement that the US dollar will continue to decline in signficance, in a relatively orderly fashion for the forseeable future, looking out perhaps over the next ten years, barring a major exogenous event, most likely of a geopolitical or military nature.

YEKATERINBURG, Russia (Reuters) - The International Monetary Fund (IMF) should expand the basket of Special Drawing Rights to include the Chinese yuan, commodity currencies and gold, a senior Kremlin official said on Tuesday.

The SDR is an international reserve asset allocated to member countries with its exchange rate determined by a basket of currencies, at the moment including dollar, euro, yen and sterling. A review of the basket is due in November 2010.

"The rouble, yuan deserve to be included in the SDR basket," Kremlin economy aide Arkady Dvorkovich told a news conference ahead of the first summit of Brazil, Russia, India and China, known as BRIC, in the Russian city of Yekaterinburg.

"It is important that the composition of the basket also reflects the role of commodities in the global economy," Dvorkovich said, naming Australian and Canadian dollars as possible candidates.

"We also think that gold has a potential as a possible participant. The price of gold has a negative correlation to the dollar. Therefore it is beneficial to tie these two instruments into one so that investors feel safer," he said.

Dvorkovich said he doubted Russia would complete its transition to an inflation-targeting regime which implies a freely floating exchange rate for the rouble next year when the IMF basket's review takes place, as announced by the central bank.

Dvorkovich said BRIC leaders will discuss new reserve currencies at the summit but called for caution in the currency debate, saying it was in no-one's interest to ruin the dollar.

Russia rattled financial markets last week when a central bank official said Moscow will cut the share of U.S. Treasuries in its forex reserves in favour of IMF bonds and bank deposits.

Finance Minister Alexei Kudrin played down this statement over the weekend saying the dollar's status as the world's main reserve currency would unlikely change in the near term. Dvorkovich said new reserve currencies were inevitable.

"The world economy will grow... In the future we are sure growth will resume. This growing pie should be divided in a fairer way. We are not talking about excluding the dollar but the share of other currencies should increase," he said.

He said BRIC leaders will discuss investing their reserves, which are among the seven largest in the world, in each other's currencies, settling bilateral trade in domestic currencies and striking currency swap agreements.

"It would make sense for us if our partners agreed to place some of their reserves in Russian roubles," Dvorkovich said.

He said BRIC countries had a common position regarding the reform of the International Monetary Fund while a decision by China, Brazil and Russia to purchase SDR-denominated bonds issued by the IMF would boost the role of SDRs.

"Any expansion of the IMF's resource base implies ... strengthening of SDRs' role in the international currency system," Dvorkovich said.

Madame Le Moderateur

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Need Little - Want Less - Love More

The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustainable recovery.

"There is a vision to remake the world's economy according to the neo-liberal agenda, and to rule it with an 'iron rod' wielded by the US. It would be under the control, described as benevolent guidance, of an oligarchy of the self-proclaimed wisest and most powerful of the multinational elite. The key goal now is to subdue any effective competition, and to gain the full cooperation of the other major powers. They are testing their model of a confederation of nations under central control in Europe."Welcome to Jesse's Café Américain - These are personal observations about the economy and the markets. In providing information, I hope this allows you to make your own decisions in an informed manner, even if it is from learning by my mistakes, which are many. As a standing policy I never provide individual investment advice to anyone. I will only occasionally disclose my personal positions for purposes of illustration. Understand that my own circumstances could differ greatly from your own, and therefore what is suitable for me may not be suitable for you. My comments are intended to be reflection on general macro financial and economic events and trends.